VCs Evaluate Cloud Investments
A number of cloud-related companies have attracted investment from venture capital firms in recent weeks and doubtless many more are queuing up for funding as well. So, just what are VCs looking for in an investment candidate?
At a fundamental level, investors say are looking for the same attributes they seek in any company, regardless of the market. Kevin Spain, principal at Emergence Capital Partners, cited the quality of the management team, size of the market opportunity, customer value proposition, and underlying economics among the main factors. Emergence Capital earlier this month led a $10 million capital infusion in SupportSpace, which provides remote tech support services to consumers and SMBs. Salesforce.com was the fund’s first investment
As for the cloud dimension, the way a company leverages the technology is what matters.
“One of the key things we really look for, and think about, is whether the business is taking unique advantage of the cloud environment,” Spain said.
In Spain’s view, the cloud stands out for the ability to dynamically dial up and dial down computing and storage resources. A business line like e-mail archiving makes sense here, because the application tends to be spiky in terms of demand, he noted.
Here’s why: when a search is made against an e-mail archive, there’s a large amount of data to pour through, sort and analyze. A lot of resources must be thrown at the search algorithm in order to deliver results in a timely fashion. A cloud-based approach can accomplish this, providing a great user experience and letting organizations pay as they go when it comes to applying computing resources, Spain noted.
Emergence Capital’s investment in SupportSpace sheds additional light on what the company is looking for. Spain said SupportSpace leverages a crowd-source cloud of independent experts. Helping customers with their technology problems, SuppotSpace’s virtual workforce is compensated on a per-incident basis. This model, Spain said, makes support a variable cost and matches support supply with the demand for resources.
“It is a labor resource cloud we are bringing to bear in this very large market,” said Spain, who serves on SupportSpace’s board.
Venture firm Sigma Partners, meanwhile, also invests in cloud companies, most recently Nasuni, a startup that aims to provide a gateway to cloud storage. Paul Flanagan, managing director at Sigma Partners, said the company starts with the founders when it eyes an investment opportunity and considers other fundamentals such as the size of the market opportunity.
Beyond that, the job is to find companies that address problems that are perceived to be simple but are actually complex and require deep IT to solve, Flanagan said. Another criterion: the solution has to be easy to use.
In Nasuni’s case, the company’s cloud storage gateway “sounds simple but, in reality, executing and doing it right is very hard,” said Flanagan. The company’s technology, however, “will make it very easy for businesses to use clouds for storage,” he added.
“You need to need to do something that is really hard to do,” agreed Andres Rodriguez, CEO of Nasuni.
That said, a start up has to be realistic about the scope of its task. The technology should be something a company can develop with a handful of experts, Rodriguez said. Nasuni, he noted, has just a handful of core engineers.
Thus, with a relatively small amount of money, “we can concentrate expertise and develop something that a bigger company would have a hard time doing,” Rodriguez said.